- Former Treasury Secretary Larry Summers is closely watching Japan's falling yen.
- The Japanese currency is still sliding despite recent official interventions to stem the selloff.
Former Treasury Secretary Larry Summers has warned investors to keep an eye on the yen as the Bank of Japan battles to prop up its currency against the soaring US dollar.
The Japanese currency briefly jumped 2.59% to 145.67 yen per dollar Monday on suspected intervention by the country's authorities, but had slipped 0.96% to 149.10 per dollar at last check.
Japan's government has repeatedly dumped dollars and bought yen in a bid to support the currency, which has plunged over 29% year-to-date to fall to a 32-year low. The yen's slide that brought it above 150 per dollar last week increased pressure on the BoJ to hike interest rates for the first time since January 2016.
"There's been a lot of borrowing money in Japan to finance things all over the world," Summers told Bloomberg TV's "Wall Street Week" on Friday. "So if Japanese interest rates start to change, that could be a pretty big deal."
Most economists don't expect Japan's central bank to raise interest rates above their current –0.1% level until BoJ Governor Haruhiko Kuroda retires next year. Kuroda has tended to shrug off the impact of rising inflation in favor of maintaining ultra-low interest rates.
But the yen's significant depreciation this year has challenged Tokyo's "dirty float" regime – where exchange rates are allowed to fluctuate, but the government buys up yen to keep it pegged to the dollar within a certain range.
Abandonment of the peg would likely cause significant upheaval in financial markets, Summers said. The yen is the third-largest reserve currency in the world, behind the US dollar and the euro.
"Whenever you peg things — whether it's an exchange rate or the interest rate or you stabilize the price of a commodity — it's always easier to begin stabilizing it by saying the government's committed to maintaining a price, than figuring out how to manage the situation when you no longer want to be committed to that price," Summers said.
Japan's vice finance minister for international affairs refused to comment on
The Japanese government is suspected to have intervened in currency markets on Friday and Monday, though ministers have refused to comment on the issue in public. But foreign exchange strategists said the spike to just over 145 yen per dollar was likely caused by Tokyo buying up more of its currency.
Japan isn't the only country that has seen its currency plummet against the dollar this year.
Aggressive Federal Reserve interest rate hikes have led to the greenback soaring against rivals including the euro, the British pound and the Chinese yuan. Rising interest rates offer higher yields to foreign investors, boosting dollar demand.
That's drawn central banks into what economists call a "reverse currency war" – where policymakers scramble to hike rates aggressively in a bid to tame red-hot inflation and stave off soaring import costs.
Tokyo made one of the first moves in that global battle. Last month, the BoJ dumped dollars for the first time since 1998 in a bid to shore up the yen. But the currency has still slipped 6.26% against the dollar since its intervention on September 22.